fund manager of the new star uk growth fund is optimistic the market could be 20% higher within a year's time
Despite steep declines in the stock markets, Stephen Whittaker, the replacement manager of the New Star UK Growth fund, is remarkably bullish in his outlook and has positioned the portfolio for a market recovery.
Whittaker spent 15 years at Perpetual (now Invesco Perpetual) before leaving last May to join New Star in one of a succession of high profile hires by New Star.
During his time at Perpetual he built up an excellent performance track record managing the Perpetual UK Growth fund. In joining New Star, he replaces Alan Miller, New Star's chief investment officer, who was taken off the fund after a period of underperformance against its peers.
Are you confident you can turn around the poor performance of the fund to the point where it will be a top decile performer?
I've done it before, I expect I can do it again. Once I have been here a year I expect the performance figures will show a big improvement.
But to get the numbers going back to inception, that will probably take around two or three years.
How would you describe your investment style?
I combine top-down macro economic views with bottom-up stock selection. I always think about the big picture, ie what is happening in the world in relation to interest rates, inflation, and all other key numbers.
So I look at which areas of the economy are likely to do well and which are not. Then I see what I can find that fits this bill. For example, I expect that consumer spending will hold up pretty well given the interest rate outlook. As a result, builders and retailers are well represented within the fund.
What themes are evident in the fund now that it has been revamped?
I have positioned the fund in line with my expectation that the stock market is bottoming out and going to rally. For example, I have a big overweighting in the life assurance sector. Pessimism has been completely overdone, along with concerns about capital adequacy, so these stocks are very cheap. Around 10% of the fund is invested in life assurance companies.
Also, if the market is going to rise, the life assurance sector is a warrant on those gains.
What other significant changes have been made?
The P/E on the fund has come down to around 11 times earnings and the yield has increased to 5% under my management.
I have increased the number of holdings. Previously there was around 70 companies in the portfolio and now there are about 85. Much of that increase has probably come through the introduction of mid cap stocks. I have increased exposure to areas such as construction and house builders and have also bought into the chemical sector, leisure and the food sector.
In what other areas are you overweight?
I'm overweight construction, building, leisure and entertainment. This is typical of the view I have had for some time in my previous portfolio.
I have been increasing media exposure, which is quite a position to me. That is because some of the stocks like EMI have been overly depressed (on a P/E of 10 times) and there is scope for the share price to improve. It is not because I'm overly optimistic about the music sector, I just think that the pessimism in the share price has been overdone.
I have also gone overweight transport, through bus and rail companies like First Group, National Express and Go Ahead. This is a growth sector. Stocks have all been knocked down because of what has happened in the rail industry in the past year or two. This has created valuations that are compelling. Looking forward, whatever government gets in, public transport has to be improved. Transport is an area that is not necessarily going to offer the highest growth, but valuations are low and growth is definitely out there.
What areas are you most underweight?
I'm still cautious on big pharmaceuticals. I do hold GlaxoSmithKline, but I don't hold any AstraZeneca. In pharmas the organic growth is not there. AstraZeneca is expensively rated and there has been a trickle of disappointing announcements on drugs.
I am also underweight in the oil majors. I have no exposure to BP and Shell. The oil price is artificially high on the expectation of war in the Middle East.
I believe if there is a war, it will be very quick and that the oil price will fall back. Also, I don't think that valuations on BP are compelling, it actually looks expensive, irrespective of where the oil price is.
Why are you so confident about a recovery, and what will be the main stimulant?
I am confident the market will go up from here. It might get worse before it gets better, but over one year I expect it will be higher. I'm banking on the index coming back over a year and if it does I expect I to make a lot of money from these stocks.
There will be no one catalyst. Rather, it will be a gradual return of confidence and the realisation that the situation is not as bad as share prices are suggesting.
Are there any external factors that could have an impact on index performance?
What happens in the Middle East will have an impact, but it is only one of many things. The recovery will be more about the day-to-day grinding out of results and statements and just assessing each stock on its merits and seeing whether it looks attractive or not.
Over time, there will be a rebuilding of confidence. It won't come back over night, but in one year's time I'm confident the market will be higher than it is now.
It could easily be 20% higher, but remember that is coming from a very low base.
I have zero cash. One wants to be fully invested at these levels in the market.
However, if you believe that the market is going to fall further, stocks that have been defensive like oils and tobaccos are only going to fall less, you aren't going to make any money so you may as well have cash.
At what point did you turn so bullish on the stock market?
I had the whole of the summer off, and I came back into the market and looked at valuations and what was going on in the world and I felt that UK companies looked overly depressed at these levels.
Earlier this year I had quite a cautious portfolio, and that is probably what has changed, when I went out in May the market was at around 5,300 and now I've come back and it's under 4,000. That's made a big difference Confidence is low at the moment, but I think the stock market is being dominated more by sentiment than actuality, sentiment is poor and that can lift.
With a 5% yield, are you banking on getting most of your returns from dividends?
Good question. Certainly if the average yield is 5%, then you are more than half the way toward achieving a decent return already.
The dividend is no more important now than it has been in the past. It has always been important, except for that unusual period in the late 1990s when there was an anomaly.
Would you only buy stocks that are paying a good dividend?
Most have a good dividend, but there are others with very low or no yield at all. For example I have a small portfolio of biotech stocks.
These include: Celltech, Biotcompatibles, Cambridge Antibodies, Oxford Glycosciences. Biotechs would account for 2% of the portfolio.
Are you compelled to operate within any risk constraints relative to the index?
There are no risk constraints other than the unit trust rules. I'm prepared to take significant positions. Of the top 10 companies in the FTSE, I own only GlaxoSmithKline and Lloyds
What are some examples of significant holdings in your portfolio.
I have Barratt Developments, which is a play on strong house building in the UK. House building cannot fail with interest rates at these levels. Unemployment is low, real wage increases and affordability is very high.
In the food sector I hold Tate & Lyle, which is coming off 10 years of difficulty and is showing a very strong recovery in its profitability. I also hold Aviva in the life assurance sector. I feel the worries about capital adequacy have been overdone. That is a very overweight position.
Does Alan Miller (the previous manager) still have any involvement in the portfolio?
No. He works on the desk and looks after his hedge fund.
Does John Duffield get involved?
No. Like any manager of a business he's going to be interested in what's going on, but he's not about to tell me how to invest the money.
Are there any major changes from how you ran the Invesco Perpetual UK Growth fund with your new portfolio?
There is nothing particularly different. That is really why I came here. It meant I didn't have to change the way I go about my work.
Do you miss working with Neil Woodford?
There was a very good team at Henley, but there is a good team of people here, for example there is Toby Thompson on the income side, and Tim Steer in mid caps.
It is a different resource, different people, but the quality is still there in my new role.
At New Star we all work on the same desk and there is a free flow of information, so it is very similar to the regime that I used to be involved in at Perpetual.
What made you decide to leave Invesco?
I wasn't really looking to move, but this offer was one of those things that came out of the blue and I decided I would rather be in a small environment rather than a large company.
I was initially very sceptical when approached, but the more I learnt about the business and John Duffield's ambitions and attitudes, I felt it was something that I recognised from where we were with Perpetual 10 years ago.
FUND MANAGER: STEPHEN WHITTAKER
Stephen Whittaker joined New Star after spending 15 years with Perpetual.
At Invesco Perpetual he ran the UK Growth fund, since launch, which was one of the strongest performers in the UK All Companies sector.
In his new role, Whittaker is charged with reversing poor performance of the New Star UK Growth fund.
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